Analysis: Private Sector – Key to Economic Growth

Wednesday, September 14, 2005

The private sector only gets a brief mention in the Millennium Development Goals. Yet it is business – entrepreneurs, employers, investors and workers – who are best positioned to help Africa achieve the Goals.

Take Goal 1, perhaps the most important of the MDGs, which sets the target of halving poverty by 2015. This will not happen unless there is sustained economic growth in Africa at a minimum level of seven percent. But such growth will only come as a result of private sector efforts.

Although growth rates have been climbing steadily in recent years, reaching five percent on average in 2004, the continent still has some way to go before economic conditions are suitable for achieving the MDGs.

One area where private sector intervention could really make a difference is boosting the use of information and communication technologies (ICTs) as proposed in Goal 8.

ICTs are crucial for developing countries. They help reduce costs, improve productivity and increase access to domestic and international markets, thus contributing to economic growth and competition in the global economy.

ICTs also directly benefit the poor. Tanzanian fishermen are using mobile telephones to get the latest information on market prices. If the fish market in Zanzibar is already over-supplied, they sail on to Dar es Salaam to sell their catch, simultaneously ensuring that they do not undermine the price they can get.

It’s indisputable that the private sector has played a major role in the evolution of ICTs, particularly in the mushrooming mobile phone networks. Nigeria has the world’s fastest growing mobile market, increasing by about 143 percent in 2003. That’s the kind of growth that will bring the MDGs within reach.

So why is Africa finding it hard to achieve the necessary growth rates? Tariff barriers and border restrictions, heavy and indiscriminate taxation, complex, time-consuming regulations and bureaucracy have all played a part.

Vigorous entrepreneurship can be seen in the informal sector all over the continent but these constraints, as well as disincentives discouraging investors, prevent small operators from thriving and expanding their businesses to become energetic – small and medium-sized enterprises and the engine of African growth.

Africa does not just need growth per-se, but specifically growth in labour-intensive sectors that leads to job creation and wage improvement. This link is vital because the fastest exit from poverty is through employment and higher salaries.

Recently Africa’s capital markets have shown strong potential for mobilising private investment. These markets have also played an important role in institutional reforms, such as privatisation and liberalisation. The market value and the number of listed firms rose between 1990 and 2002 in most of the 18 African countries with stock markets.

The message for development partners and policymakers in Africa is that the only sustainable path to meeting the MDGs is by involving the private sector, and thus boosting economic activity, job creation and incomes. Governments should not seek to micro-manage private business, but instead should improve governance, speed up processes and reduce red tape.

As a recent discussion paper on African development put it: “Government can provide the yeast which will make the bread rise, but it is business that will have to provide the ’dough’ – in all meanings of the word.”